Gas Tax Holiday Would Cost $20 Billion

This week, a group of senators introduced legislation to suspend the federal gas tax through December 2022 amid rising inflation. We estimate the proposed gas tax holiday would reduce gas tax revenues by roughly $20 billion, and could worsen inflation once the holiday expires.

The federal gas tax includes an 18.3-cent-per-gallon tax on gasoline and a 0.1-cent-per-gallon Leaking Underground Storage Tank (LUST) fee. The revenue raised flows into the Highway Trust Fund and is used to pay for most federal transportation spending. The bill would suspend both taxes from the date of enactment (for purposes of our analysis, we assume the gas tax holiday begins on March 1, 2022) through December 31, 2022. As a result, revenue flowing into the Highway Trust Fund would significantly decrease, though the legislation would offset that decrease by transferring general revenue equal to the amount of forgone federal tax revenue into the trust fund. 

In this calendar year alone, more than $42 billion in revenue is expected to flow into the Highway Trust Fund, over three-fifths of which will come from the federal gas tax. A federal gas tax holiday that lasts from March through December would decrease trust fund revenue by $20 billion, cutting this year's Highway Trust Fund revenue stream nearly in half. Without the general revenue transfer in this bill, this holiday would advance insolvency of the Highway Trust Fund by a year, from Fiscal Year (FY) 2027 to FY 2026.

While the gas tax holiday may reduce prices at the pump, it will further increase demand for gasoline and other goods and services at a time when the economy has little capacity to absorb it. The result could be even higher rates of inflation in 2023.

With the Highway Trust fund currently just five years from insolvency, lawmakers should not pursue policies that would widen the gap between dedicated revenue coming into the trust fund and spending coming out of it, while using one-time general revenue transfers to make up the difference. Instead, they should pursue trust fund solutions to close the structural imbalance between Highway Trust Fund spending and revenue.